Traversing the COVID Wormhole
Airtm Break-even and our Series B.
This second offering in the Airtm Team blog series is based on an email I sent to the 89 Airtm employees on May 13, 2020.
Over the past five years as a first-time CEO I’ve come to believe that startup success depends on solving the principal/agent problem by making every employee understand how their contribution is essential to the success of the startup. (h/t to Naval Ravikant for introducing me to the concept in his awesome wealth creation podcast).
This “Why you are essential” process is a great test of whether your team has fat to trim. But for me its greatest utility is as a tool to motivate and align the team to achieve the mission. For any startup employee to understand their contribution to the startup’s sustainable growth (synonymous in my mind with startup survival, now more than ever), they need to understand the business’ top-line growth, unit economics, and expenses; I believe that ideally everyone in a well-run startup is contributing to all three.
For anyone interested in how startups work and the way startup CEOs think, I hope this post serves as a guide on the importance of going from zero-to-one before trying to go from one-to-N, as well as the importance of breaking even to reduce dependency on VC money. I highly recommend David Sacks contributions on the Spearhead podcast regarding the importance of a startup understanding its unit economics.
I’ve redacted the original email I sent to the Airtm Team for length and to keep confidential certain operating insights we’ve gleaned by serving hundreds of thousands of users over the past five years.
I’ve noted the cuts (and in some instances the reasons for the cuts) below.
Dear AirTeaM:
With the global pandemic and its devastating economic impact, the world faces unprecedented uncertainty. Individuals, businesses, and governments everywhere on earth are all facing the same questions, threats and challenges.
I’m writing to all of you to explain in detail how this uncertainty impacts Airtm, how we and our clients can adjust as a company to emerge from this dark period stronger than ever, and how I’m relying on each of you to contribute to our survival and success.
The Mission
Every startup is a voyage of exploration and discovery, like the one in the great film Interstellar — longshots to a better world. They are by definition risky and difficult and require a great deal of grit and perseverance. That’s the nature of trying to solve very big old problems with very new technology.
Since our launch in 2015, the Airtm spaceship has been on a mission to become one of the most reliable financial services in Latin America. Thanks to all of our hard work, hustle, and ingenuity, we are on course to dramatically improve the lives of hundreds of thousands of people every day.
It’s important to remember that we have built and are building something that never existed before, a financial service that is 10X better than any of the existing alternatives for hundreds of millions of people around the world.
My one burning obsession over the past five years has been to keep us on course to realize this awesome goal and in doing so to avoid the fate of the vast majority of startups: shipwreck.
The Wormhole
With the pandemic and related economic mayhem, successful outcomes for startups are more uncertain and riskier than they were pre-Covid. As in Interstellar, we must pass through this strange and poorly understood wormhole to continue our mission. On the other side is our Series B that will fuel our voyage to reach the millions of clients who need Airtm.
It’s essential to me that you all understand how we’re going to get there and how each of you contributes to providing the thrust, navigation, and defenses we need to carry us and the many Airtm clients who depend on us, safely through the wormhole to the other side.
Our Ship
Of course Airtm is not really a spaceship traversing the cosmos, but rather a for-profit business, i.e. a money-making machine made possible by the contributions of everyone on our team and our investors. No matter what your role is at Airtm — engineer, support, product, compliance, legal, partnerships, or direct connections — you are part of Airtm’s larger goal of meeting our clients’ needs and thereby making money for the services we provide them.
The more happy clients we have, the more money we make, and the more clients we can serve and acquire by improving our products and marketing them to the many many people around the world who need them (now more than ever).
I think the spaceship metaphor is useful because it captures two key concepts: 1. that we are all in this together on an exciting mission to change the world, and 2. running out of fuel before we pass through the COVID 19 wormhole is not an option.
Fuel
Our spaceship is fueled by money. We cannot complete our mission if our fuel is depleted. We will be left adrift in space. Dead. Distilled to its essence, my job is to make sure this does not happen.
Our fuel comes from two sources: 1. From the fees we charge Airtm clients for using our financial services and 2. From venture capital investors (VCs) who are betting that we will complete our mission to become one of the biggest financial services in Latin America. We’ve relied on the second source to get our ship built and launched and to escape the gravitational pull of startup failure by finding product market fit (first in Venezuela, and now in many other countries throughout LatAm). The first source, revenue from clients, has grown steadily, but is still not sufficient to power us through to the other side of the Covid wormhole.
The two fuel sources are related: the more fuel Airtm generates for itself in the form of profit (revenue from selling our services that exceeds the cost of providing those services), the more fuel VCs are willing to provide, because the higher the likelihood that Airtm will reach its mission (thereby making the VCs’ share of Airtm worth a lot more than the money they are investing).
VCs make investments in startups based on models they’ve developed to predict which teams are likely to succeed. The pandemic has added many new variables and unknowns into the models VCs use. Most are waiting to see how things play out before pumping precious fuel, i.e. money, into new startups. Many are waiting to see which spaceships make it through to the other side of the wormhole.
That is another way of saying they are waiting to see which startups show signs of becoming sustainable businesses.
Fuel Production
How do startups become sustainable businesses? I’ll get into Airtm specifics below, but generally it works like this:
- Selling a product (good or service) at a higher price than it costs to make, commonly referred to as having positive unit economics.
- With the money left over after deducting costs of sales (often called gross profit), companies need to cover the expenses related to operating the business.
Now let’s look at Airtm. We sell financial services, charging fees for helping our clients move their money into and out of Airtm’s money-making machine.
In order to facilitate a single transaction, we incur costs, including our cashiers, Amazon Web Services, and software subscriptions like Kount and Onfido. The more clients who use Airtm, the more of these services and tools we need. In my Interstellar analogy, these are spaceship-related costs — without them we would not have anything to sell to clients.
Airtm’s Unit Economics looks like this:
[Many companies, attempted to establish P2P agent networks, but failed. Airtm figured it out, with thousands of daily active agents, each making a good living completing Airtm client transctions. We acquired much scar tissue in the process, and that proprietary knowledge is reflected by our unit economics. That’s why I’ve cut here.]
Next come Airtm’s expenses, which include everything we need to have an expert crew to operate our spaceship, including all our salaries and the tools we use, such as G-suite and Slack, to do our jobs efficiently and at the highest-possible quality.
The more money a startup has left over after its expenses (Net Income), the more it can invest in acquiring new users who will purchase more of its products and services.
Fuel Meter
There are two ways we can make sure that Airtm has the fuel it needs to avoid the fate of so many startups, i.e. becoming a lifeless ghost ship floating through cold dead outer space:
1. Make more money by generating more fees with positive unit economics (more revenue, less costs, and increase gross margin); and/or
2. Spend less money operating the ship (reduce expenses).
The information for both revenue, costs, and expenses is expressed in a company’s profit and loss statement (also referred to as its P&L). Revenue is at the top. Next comes costs directly associated with producing that revenue. And then expenses, which are netted from gross margin. After that, interest from loans, taxes, depreciation and amortization are applied. Then, the result is how much money the company actually makes or loses (profit or loss). When people talk about the bottom line in the startup context they are talking about whether a company burns more fuel than it makes or makes more fuel than it burns.
Here is a summary of Airtm’s P&L:
[CUT for same reason as Unit Economics above]
Fuel Production (Revenue)
Our clients provide our fuel, both from a financial and existential point of view. We are here to help Airtm clients thrive by providing them the most reliable and high-quality financial services. Our clients need these services and are willing to pay for them because their local money and/or financial system are not reliable, fair, or free. That’s how we generate the fuel we need to serve even more clients (and thereby generate more fuel).
To get more clients, startups rely on different client acquisition channels, mainly:
1. Paid advertising (buying ads);
2. Word of mouth or WOM (people telling each other about the product); and
3. Organic (people finding your product as they search for a solution to a problem).
Companies’ growth teams spend their time optimizing these channels for the lowest Client Acquisition Cost (CAC) and the highest value generated during a client’s use of the startup’s services (referred to as Lifetime Value or LTV). The higher the LTV to CAC ratio, the better your fuel-making machine works.
Soon after launching in 2015, we became experts in serving our Venezuelan clients’ needs, and were able to acquire them very cheaply through Facebook ads. When Facebook banned Airtm ads (mistakenly lumping them in with cryptocurrency-related ads during the ICO craze), we shifted our growth strategy towards optimizing our WOM and organic channel growth. That’s why our referral reward program is so important: it gives clients yet another incentive to share Airtm with their friends.
As you know, we now not only have a simple referral program where users receive AirUSD when they bring a revenue-generating user but also get a piece of the revenue we make from their invitees. The new referral program is now being pushed through our Airtm Ambassador Program which consists of recruiting influencers and power users to become Airtm evangelists. Most of our new users however, come to us organically because the financial systems and services where they live are so bad that they are desperate for alternatives.
Companies optimize their online presence to increase the yield from Organic Growth. Our organic channel brings in more than 40% of all new users even though we have never spent resources optimizing it. The first optimizations are scoped for this quarter and it is very important they come out on time.
As you can probably tell however, there is a high correlation between WOM and Organic channels. The more happy clients telling friends and family about Airtm, the greater the chance that someone will search for us online and sign up. As these channels complement each other and compound our success, they also highly compound negatively when we give our users a bad experience. Negative experiences with our product not only make it more difficult for the word about Airtm to get around but they also make it very difficult to retain existing clients. That is the reason why we are so focused on getting to zero product errors.
Fuel Leakage (Churn)
Churn is the term used to describe a fee/fuel-generating client that stops being a client. Churn wastes fuel and is a leading cause of startup death. Churn makes it difficult for a company to grow as the more clients it loses this month, the more it needs to acquire to grow the next month. In Airtm we call Engagement the expense associated with acquiring users to cope with Churn. It is one of our largest expenses and if you bring forward the expense of churn over time to today it becomes by far the largest. This is the reason why we made an exception to our hiring freeze in order to hire our new client life cycle expert, Manuel.
Manuel is focused on understanding and reducing churn, as well as helping us understand what makes signups convert into clients and what makes clients do more revenue-generating transactions i.e. deposits, withdrawals, and crypto buys and sells. That is why our marketplace efficiency is very important: the higher our transaction acceptance rate, the more money we make, and the better the experience for our users. This is the reason why the work of our marketplace team is so critical; their objective this quarter is to get to a 95% acceptance rate globally. Aside from having a solid experience, the more problems Airtm solves for clients, the more they need us, and the more money we can make from them to fill our ship’s fuel tank.
Fuel Burn (Costs)
Airtm makes money every time someone makes a deposit or withdrawal transaction, when they buy or sell cryptocurrency, or use our debit card. We charge fee every time. With the money we make, we have to cover our agent and other service provider costs. What’s left over is our net revenue per transaction.
[CUT: same reason as Unit Economics above.]
As you can see, Airtm’s largest costs are our agents, to whom we pay about [CUT] of the money we make from each deposit and withdrawal. This is the reason why the automatic exchange rate bot is so important as it helps us optimize for higher revenue and acceptance. The second largest cost is Amazon Web Services, whose price grows proportionally to the amount of transactions completed. This is the reason why lowering the amount of money we pay Amazon is a constant objective across quarters. The higher the revenue and the lower the cost, the more money we actually make or the higher transactional margin we have.
Because we incur no cashier costs from facilitating a send transaction, our margin would be quite high if we were to charge a fee on send money transactions between Airtm clients. That is the reason why we are considering implementing such a fee. Though their economics are quite different, the debit card and the ACH connection create additional revenue streams as well.
Adding new products to our offering not only allows us to create additional revenue streams but to get closer to a full product offering. That is a product that meets the specific demands of our customers. By doing so, we make Airtm a more engaging product driving churn down and bringing our transaction volume and revenue up. This is the reason why we are so eager to build and launch features such as the physical debit card, the ACH connection, our mobile app, etc.
By multiplying our monthly active clients by their average completed transactions and the revenue they generate we calculate our monthly revenue. Subtracting then the costs incurred by servicing the transactions we get the gross profit. You now have enough information to understand Airtm’s most important KPIs, check them out on the table below.
[KPIs are the stars by which we navigate the Airtm spaceship. Learning which ones to rely on to guide us on our mission has been hard-won knowledge that we can’t share with the world. That’s why I cut them here.]
Fuel Burn (Expenses)
Now, to put things in perspective, we need to compare the company’s gross profit to its operating expenses. That is how you know whether or not a business is a good or bad one. Operating expenses include all of those things that businesses need to operate that don’t scale at the same rate as transactions grow. It would otherwise be a cost directly related to facilitating transactions and would be better allocated in the section above.
For most startups, the highest expenses are their team’s salaries. For tech companies like Airtm, since our future growth depends on our product, our largest expense is our engineering (Tech) team. Other than that, understanding Airtm’s expenses is not complicated.
[Cut for same reason as P & L above]
Fuel Equilibrium
Turning a startup into a sustainable business depends on making more money than it spends. You might have heard it referred to as “breaking even”.
Since the VC fueling ships are all waiting patiently on the other side of this COVID wormhole to see how things play out, startups in our position have to adapt their strategy to survive with the fuel that we have and the fuel we can produce.
If a startup has not reached break even, you can then compare the net income to the cash it has in the bank and estimate how long a company can keep things running at the current monthly spend (burn rate). The amount of time a company has to live on its cash reserves is called runway. If a startup cannot break even before its fuel runs out or it can reach a VC fueling ship, then adjustments to the burn rate have to be made.
By looking at Airtm’s net income, you can tell that we still have a gap to close before we are able to break even. But how big is it exactly? Our monthly burn is on average around [CUT] and we are expecting to grow at about 8% per month going forward (if this seems low, it is — when you plan financially you have to do it for the worst case scenario). Even though we are putting a cap on the amount of money we spend (expenses) and we have[CUT] million bucks in the bank, that gives us a runway until [CUT]. The amount of money we are missing to break even at our current burn and revenue growth rate is [CUT] that is our gap as things stand.
Traversing the Wormhole
Since the recent economic crisis was not foreseen by most, there will be many startups and even well-established companies that have a difficult time avoiding catastrophe, either bankruptcy protection or complete liquidation. As it’s very understandable, not being able to sell their goods or services completely shifts things for businesses. What do you think will happen to a company whose revenue is reduced nearly to zero and they have large expenses in the form of team salaries, rent, providers, etc.? Airbnb just announced they are letting go 25% of their staff, over 1,000 people.
The companies whose operations were not abruptly halted have to deal with the fact that consumers have less income to buy their products. Their prices will have to be adjusted, they will make less money, and will be forced to rethink their business models.
Thankfully, Airtm belongs to a third category of companies. The ones that the world economic crisis will bring growth to. Regardless of that, it will take some top notch planning, precise execution from all of us, and a bit of luck to come out of this one without having to make drastic changes. We’ve had at east 7% growth per week in the last months.
Control Panel
Now that you understand (hopefully) how the Airtm spaceship generates fuel and burns it, I’d like to explain the control panel and instruments that I use to keep Airtm on course.
As described earlier, there are basically two levers we can adjust to navigate our ship to the Series B that we deserve based on our success thus far and the giant market Airtm has the potential to dominate:
1. make more money, 2. spend less money.
Instead of giving paragraph explanations about each item in our action plan you can check out this document [Unlinked] where all of our initiatives aimed at optimizing these levers are detailed. As far as our strategy to narrow the gap and break even before our money runs out goes, well, you can find that below.
[CUT for the same reasons as the other things. I hate to cut this out as it was the most important part of the email. As you know, the email was meant to make my crew understand how our ship works. This last part showed everyone why success is at our grasp in an objective way.]
The Unknown
Because we are operating in an unprecedented environment, I cannot guarantee that our plan will succeed.
Although I believe the pandemic and related currency dislocations (inflation, controls) will drastically increase demand for Airtm services, it is impossible to predict how these unprecedented conditions will impact our clients, their families and businesses, and the countries where they live. Times will surely be tough for us and every other business, but as things stand I am thankful to have each and every one of you by my side as we navigate into the uncertain future.
Like with everything in life, in business it doesn’t pay off to worry about the things that are not in one’s control. Even though we have to carefully maneuver and strategically ration our supplies it is my belief that our future is for the most part in our control. Though bad for Latin American people, the crisis will force central banks to print money to stimulate economic growth making LatAm fiat inflation a certainty. And it will be up to us, the Airteam, for there to be an economic life preserver for every person out there looking for one.
I thank you for reading me and I welcome any questions or concerns you might have about our strategy. When things change and we are forced to vier course you have my word, you will be the first to know.
Thank you for all your hard work.
Sincerely,
Ruben
P.s. I received a ton of help from a humble editor [CUT, he asked me to keep his name a secret], and I wanted to thank him.
